Big Game? An Enron Survivor Hunts for Riches

By CHARLES DUHIGG

Published: January 21, 2007

THE South Pacific islands of Papua New Guinea, where canned mackerel occasionally serves as currency and cannibalism was once on the menu, are a long way from the corporate jungles where Enron was born.

Yet amid the wreckage of Enron, the energy giant that went bankrupt in 2001, is a leftover sliver of the company that is still doing business in Papua New Guinea: an oil refinery near the country's capital, Port Moresby, that was shipped there from Alaska and in which Enron continues to hold a small stake.

In November, the relatively obscure Houston company that owns most of that refinery, the InterOil Corporation, made the kind of announcement investors crave: explorations near the refinery had uncorked a vast pool of natural gas potentially larger than the United States' total residential consumption of the fossil fuel in 2005. The size of the discovery was so large, Phil E. Mulacek, InterOil's chairman and chief executive, informed an analyst, that simply controlling its output ''was sort of like trying to stop the Mississippi.''

Just a few years ago, such proclamations -- and the executives who made them -- might have been viewed as curiosities, if they were noticed at all. Energy prices were so low that many natural-gas discoveries were burnt off so that drilling rigs could extract precious oil deposits further below. And rattled investors might have been wary of any company linked to Enron, especially one like InterOil that was boasting of possible treasures unearthed in remote jungles.

But that was then. This is now.

After a lengthy dormant spell, the global search for gas and oil has reignited with a fervor that is transforming companies like InterOil into Wall Street darlings. ''The gold rush is back on,'' said Andrew V. Boland, an energy analyst at Peters & Company, a Canadian investment firm. ''It's like the wild, wild West, all over again.''

InterOil's gas find -- which is unconfirmed and may be impossible to transport -- caused the company's stock price to soar and its market capitalization to swell to $891 million from $572 million within three weeks of the announcement. Many of InterOil's financial backers, including Merrill Lynch, Morgan Stanley, Goldman Sachs, Wells Fargo, and Boone Pickens's investment firm, increased their bets after the discovery was revealed. Stanley Druckenmiller, a former lieutenant of George Soros, disclosed three days after the announcement that his hedge fund had poured more than $30 million into InterOil stock.

The passion for unearthing energy riches goes well beyond InterOil, of course. Yet, as the tangled history and relationships behind InterOil demonstrate, fortune and merit do not always march in lockstep in today's energy scramble. In addition to enfranchising bold explorers, energy fever has empowered scrappy promoters and would-be kingmakers who are rushing to remake nations and economies in a flash, analysts say.

In a controversial move, the monarchy of Qatar, for instance, earned a shot at becoming a regional power broker after a collection of local magnates helped to persuade the government and ExxonMobil to pour more than $25 billion into the nation's gas fields. In Bolivia, President Evo Morales is trying to use his country's gas reservoirs to force neighboring Chile to give his landlocked country a corridor to the sea.

For small companies like InterOil, the possibilities for riches and influence are even more intoxicating. ''I knew from the start this company would be great,'' said Wayne Andrews, an analyst at Raymond James who has long encouraged investors to buy InterOil. ''These guys have moved mountains. They're working in an area with huge documented reservoirs of crude oil and natural gas. This is how fortunes are made.''

Critics disagree. The company's history of disappointing results cause some to worry that not everything at InterOil is as it seems.

''This is a very questionable company,'' said Peter J. Hodson, a senior portfolio manager at Sprott Asset Management who has both owned and bet against InterOil's stock, but is not currently invested in the company. ''These are not the types of people who are supposed to win the energy race.''

INTEROIL was born in 1994, when Mr. Mulacek, a Texas oilman, bought a small Alaskan oil refinery and decided to relocate it halfway around the world.

Mr. Mulacek, who declined repeated interview requests, founded his first energy company in 1981 while he was still an undergraduate at Texas Tech University. In 1990, according to an interview with The Australian, the newspaper, he was processing oil waste in war-torn Kuwait when he met a group of Chevron executives. Four years later, they invited him to Alaska on a fishing trip that also included a tour of a small refinery that Chevron was trying to sell.

At the time, oil refineries were not in high demand. Global petroleum development had slowed to a relative standstill as energy companies faced record low oil prices. But Mr. Mulacek saw in the Alaskan refinery a unique opportunity: although the rugged terrain of Papua New Guinea, 6,000 miles away, was known to house oil and gas reserves -- in some places, visitors could squeeze rocks until their hands were coated with an oily residue -- the country had no domestic refining capacity. Mr. Mulacek, who is described by acquaintances as a uniquely intense and driven businessman, bought the refinery and started the move.